Weak Earnings Cycle To Test New Retail Investors, Says Nirmal Bang's Rahul Arora

The Indian stock market is currently facing a notable correction, with the Nifty Index experiencing an 8.8% drop from its recent high. This decline comes at a time when the earnings cycle is perceived to be at one of its lowest points, particularly as the festival of Diwali approaches. Rahul Arora, the CEO of Nirmal Bang Institutional Equities, emphasized that this situation will pose a significant challenge to new retail investors.

In an interview, Arora remarked, "This was a long-overdue correction; the market needed a reality check." He pointed out that the fundamental earnings growth has not justified the high valuations seen prior to this correction. Arora described the current earnings cycle as potentially the weakest in many years leading up to Diwali.

The difficulties in the rural economy have been particularly acute, with major companies such as Hindustan Unilever Ltd. reporting only 2–3% volume growth. Additionally, two-wheeler manufacturers and various consumer discretionary companies are beginning to feel the pinch, indicating a broader trend of economic strain.

According to Arora, over the past decade, significant earnings growth has primarily been driven by margin expansion and balance sheet improvements. Moving forward, however, the focus must shift to top-line revenue growth, an area where there seems to be a lack of clear visibility. "The market is adjusting to this new reality," he added.

Despite these challenges, Arora does not anticipate a complete market collapse. He suggested that the Nifty could find support around the 22,000 mark, although reaching levels of 26,000 will be considerably more difficult.

Many new retail investors, who entered the market after the pandemic, have only experienced an upward trend, watching the Nifty surge from around 7,500 to 26,500. This current correction represents their first significant downturn, which will test the strength of their investments and the flows into the market.

As retail and high-net-worth investors have heavily invested in sectors such as defense, infrastructure, and public sector undertakings (PSUs), it will be crucial to observe how these sectors perform as more earnings results are released in the upcoming weeks.

Arora explained that the markets are trending downward in line with cuts in earnings forecasts. He noted that many investors had been pricing in continued growth without recognizing the looming challenges. "The reality check has hit," he said.

He highlighted that if the three main sectors—banks, fast-moving consumer goods (FMCG), and information technology—do not provide support to the market, it will be challenging for the Nifty to gain traction.

Since September 27, global funds have sold off stocks worth over ₹1.25 lakh crore, while domestic institutions have bought shares worth around ₹1.20 lakh crore during the same period. The markets have consequently adjusted, with the Nifty down by 8.8%, while mid-cap and small-cap indices fell by 7.3% and 4.5%, respectively.

In summary, the current earnings cycle and economic indicators suggest a testing period for new retail investors, as they navigate through market corrections and the broader economic landscape.

Earnings, Investors, Market